Turning to more concrete matters, this article observes that the
Service's enforcement efforts have been selective to a degree which
raises troubling questions of fairness. The Service has targeted taxpayers
who emerged from an OIC with loss carryforwards (NOLs)
intact and who used the NOLs to avoid tax on unexpected postagreement
profits. Because the Service has the authority to negotiate
a reduction of NOLs as part of an OIC agreement, an assessment
of COD income after the settlement has become final has the
same effect as an illegitimate and ad hoc attempt to reopen the
agreement itself.
Loss carryforwards in this situation do present a problem, but it
does not involve COD income. Rather, the problem is one of equitable
setoff. NOLs in effect represent a claim of the taxpayer
against the government for reduced taxes in the future. Equity
would seem to require the taxpayer to abandon some or all of these
claims as a setoff against the government's claims for past taxes,
without regard to whether the NOLs relate to accruals of the cancelled
tax debt or derive from deductions of items unrelated to the
tax debt. This article proposes that the Treasury promulgate such
regulations